Fed doesn't need asset buys to keep rates low: Kocherlakota

Minneapolis Federal Reserve Bank President Narayana Kocherlakota speaks at a macro-finance conference hosted by the Boston Federal Reserve Bank and Boston University in Boston, Massachusetts November 30, 2012.

Reuters/Brian Snyder

EDEN PRAIRIE, Minnesota The U.S. central bank's $2.9 trillion portfolio of assets is what is keeping borrowing costs near record lows, not the monthly purchases that many credit with that power, a top Federal Reserve official said on Wednesday.

"We could stop buying and we would still be putting downward pressure on interest rates," Minneapolis Federal Reserve Bank President Narayana Kocherlakota told an audience at a suburban Minneapolis golf course, after a speech in which he called for the Fed to keep rates low until U.S. unemployment reaches the more normal level of 5.5 percent.

"There is this view out there that somehow the flow of purchases is what's keeping the downward pressure on interest rates," he said, adding that rates will not start to rise until investors anticipate the Fed will sell off its assets.

The central bank would also conduct sales in a "responsible" manner that would not cause an undue spike in interest rates, he said.

Kocherlakota has been privately communicating to colleagues his conviction that the Fed needs to provide still more accommodation, he told reporters on Tuesday, but his first public airing of the view was at a different Minneapolis-area country club that day.

The speech immediately marked him as one of the Fed's most dovish policymakers.

The U.S. central bank just last month ramped up its attempts to stimulate the economy by announcing new bond purchases that will swell its balance sheet further. It also vowed to keep rates low until unemployment, now at 7.8 percent and high by historical standards, falls to 6.5 percent, so long as inflation stays muted.

In remarks Tuesday that he reiterated the following day, Kocherlakota called for the Fed to extend that newly minted low-rate pledge, arguing that using a 5.5 percent threshold would put the economy back on track more quickly.

He did not call for more asset purchases, saying he is comfortable with the current pace of bond buying. But he noted that too little is known about the costs of the program compared to the benefits.

The Fed has kept interest rates near zero since December 2008 and has bought some $2.5 trillion in assets since the Great Recession to lower borrowing costs further in an effort to get more Americans back to work.

It is now buying Treasuries and mortgage-backed securities at a pace of $85 billion a month, on track to adding about $1 trillion to its balance sheet over the year or more that many economists expect the bond-buying program to continue.